Preparing for Retirement - Stocking Up For The Golden Years

2006-12-18

It’s an accepted truth that saving for retirement is best invested in stocks. With higher growth rates, stocks help build a financial cushion for the future.

However, most people assume that once they’re retired, they no longer need stocks. Typically, many pull out their portfolio and invest in an annuity – or in bonds paying a regular return. But that isn’t the best option.

Staying invested in stocks for a part of your portfolio makes sense, even after you retire. Experts advise having at least 30% of your net worth in stocks, and upto 50 %. The incremental payoff isn’t in changing your lifestyle, or building a fortune – it’s primarily keeping a larger cushion for medical expenses, or a longer-than-average lifespan.

Note also that if you haven’t put by a sufficient amount to meet your expenses during retirement, you can’t hope to make good by investing aggressively later. While you could extend your working years, or take on part time activities that bring in some income, you can’t substitute for the years of building a nest egg. Again, investment style in your later years should be a lot different from the investment strategies when you’re in your thirties; while you can afford to take risks, and invest in high growth / high risk options like commodities or foreign stocks while young, this isn’t worthwhile when you’re older.

Your objectives during retirement are to make sure you have enough to last you out through the expected lifespan; to take care of larger medical expenses or elder care that is inevitable as you age beyond the normal; and to keep a financial cushion that allows you to preserve your independence and not having to seek help from children or other family members. And this is where it helps to take stock.

The right mix is to start with about 60%, as you enter your retirement years, and slowly take it down to around 20% by the time you enter your eighties. With a judicious investment – index funds and large or mid cap stocks – you can increase your rate of return, with minimum risk. Which gives you the leeway to take care of unexpected expenses, or splurge a little more if things remain sunny.

Consider a portfolio of half a million, from which you plan to take out money for your expenses. If you’re drawing out $20,000 a year for expenses and need to plan on increasing it over time to cope for inflation, you’ll start eating into your capital. If you’re invested in fixed return securities, chances are that you’ll run out of money in 30 years. With half the amount invested in stocks, you could extend the period by another 10 years – or have close to $200,000, to take care of unexpected expenses.

And yes, if you plan to leave something to your favorite charity, or your children, that’s the way to make sure.

Related Articles:
» Is Retirement All It’s Cracked Up To Be?
» Retirement Planning for Small-Business Owners
» Retire Early: Tips to retire early and live comfortably

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